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The market trend, so where is the market right now?

The market, if you're a seller, is in a very good place, Michael. You are in a very strong seller's market. It's been more or less a seller's market for the last number of years, I'd say, going back at least, at this point, four or five years. And by the way everything we're going to say today will apply to both buying and selling a practice, because they're really two sides of the same coin. And as far as the market goes, yes, a strong seller's market. Pre-COVID, the market was starting to heat up.

COVID definitely had a chilling effect on the market, both in terms of, obviously, decreased earnings, uncertainty, and that had a downward trend on prices. But almost immediately after dental offices reopen post-COVID, and we're well over a year past that now, the recovery was very good. Before COVID, we were saying that dentistry was a great industry and was pretty recession proof and we had numbers to show that. I think at this point, we can say that dentistry is a great industry and its COVID-proof.

The values are very much back to where they were pre-COVID and, I would say, trending upward. We did have a question about what the future holds, and it's very difficult to do a crystal ball. But I would say, given the fundamentals, and the fundamentals quite simply are more buyers and sellers, had continued influx of newly licensed dentists, both those graduating from Canadian universities and new Canadians who are taking the challenge exam.

I don't see anything in the fundamentals that would indicate the market's going to go down. It's all about demand, and demand is there. We'd like to say the rarest or most valuable commodity in dentistry are patients. The population is growing at a much slower pace than the number of new dentists. And there was a question about retention post-sale, and our experience has been in a well-managed transition from one dentist to another, and we're going to talk more about that in the next hour.

There really isn't any significant attrition of patients. The other thing we should say, at this point, is that everything I've been talking about applies to general practices. Specialty practices are very much different, because in a general practice, what you're selling are the patient charts. And we know from experience of selling hundreds and hundreds of practices, both transition well. In a specialty practice, you're essentially transitioning a referral base, and that takes a lot more time and planning and there's much lower demand.

So the values of specialty practices are lower. I like to say that I was a specialty practitioner. I did endo for 37 years. I probably made more than my GP colleagues, but they more than make up for it when they sold their practice versus when I sold mine. To sum up, the best way I can describe the market is as a pyramid. If you picture the very tip of the pyramid, it's the DSOs, the dental service organizations. There are three or four of those in Canada.

They own literally hundreds of practices, and their valuation, based on the information we're getting re financing their get and, of course, the largest of them, Dental Corp Canada, just went public, so it's public knowledge that they went public at a multiple of earnings of around 16 times. So that's the tip of the pyramid. Right below it would be people or practice groups that have anywhere from, let's say, five or six up to 20, and they're going to sell at a higher multiple as well.

In a few minutes, we're going to explain in detail what makes up the multiple, but they sell at a higher value, but not as high as the large consolidators. And below that are the good general practices, which are going to sell somewhere between five and seven times their earnings. And below that are the specialty practices and practices that, let's say, have challenges, where demand is going to be less and/or earnings are lower or there are confounding factors that, again, hopefully, we'll touch on in the next hour or so.

Larry may weigh in, because I know he does represent not only sellers but quite a few buyers. Larry, do you have any comments on what you're seeing in values?

No, I think you've been pretty accurate in what I've seen, because you probably see a little bit more. I mean, sometimes, we see some practices that may go for a higher multiple than seven, if there's a lot of hidden gems or referred at work, so there's untapped potential within the practice. So generally, you might see a higher multiple than what the actual practice is doing, because there's more value sort of intrinsic in the patient base that hasn't been extracted. But generally, I think your rule of thumb is are pretty much consistent across the board.

Yeah, well, you're quite right. Neil and I recently sold a practice at nine times for precisely the reasons you outlined, a lot of hidden value. Underperforming, and the buyer could see the upside potential and actually bought it at nine times earnings.

I'll just check in with Neil. Neil, did you have anything to add or did Dr. Dolansky cover all those items?

In this section, I think we're pretty good. Added to that sale that Bernie is talking about, buyers, if they have some of their own equity built up, saved up, and this is a practice that means a lot to them, they will throw down some of their own savings as well as the bank financing and have their accountants do some projections. And we'll touch on having a good accountant and a good banker to help you shape your offer, but those were all things that were aligned for this buyer, which is why they were able to make a very strong offer for this practice.

You said bank and financing. So I just want to ask Chris, he's our Commercial Account Manager and he specializes in helping health care folks and dentist. Chris, did you want to share any thoughts? Go ahead.

Yeah, no, thank you very. Thank you very much for the good question here. The main role for the bank here, just like Neil said is, basically, to provide financing. And most of the time too, depending if the client comes to us first, we can to act as the strategic partner. So this is when we can actually bring an appraisal, bring an accountant, bring a lawyer, to bring all the other partners around the table, just to make sure that the client does receive that holistic advice.

But ultimately, it's to really help the client get to the finish line, get to the financing, and just make sure that the term and the condition works well with what the client is looking to achieve over the long term. So whether if it's a fixed rate, variable rate, so just like we walk through every single step of the way and make sure that the sale and the transition is as smooth as possible from a financing perspective.

Thanks. Thanks, Chris. I think that covers it for market trends.

Yeah.

So if everybody is OK, I'm going to move to our next item, Determinants of Value, unless anybody had anything further to add.

No. I think we can move on to the next section.

OK, let's do that. Determinants of Value. What is a valuation and what are the different valuation methodologies? And for this one, I'll let Dr. Dolansky or Neil start off. I don't know, I'm not sure if that was Larry. Go ahead.

Yeah, I'll start off and then we can let Bernie and Larry chime in. Essentially, evaluation has three purposes. One, as brokers or as sellers, it's your main marketing tool. Number two, the bank needs it for financing purposes. And number three, the buyers and their accountants and other advisors need it to gather the information, so that they can make an informed decision on whether they want to purchase this practice. For the most part, at least our evaluations, we are constantly evolving.

We are speaking to the banks, accountants, to ensure that those documents are including the information that is required. Our methodology, there's different evaluation methodologies. There's the asset valuation methodology, but primarily what's leading the market and banks, the DSOs, and us as evaluators, are all valuing on the cash flow model, the multiples of EBITDA. Over the past 12 or 15 years, it's gone from the traditional method of the asset based valuation, kind of guessing it with the goodwill is worth.

The physical assets to this model of the cash flow discounted cash flow model, where we normalize expenses and come up with a true earnings of the practice as an investment, whether it's an individual buyer or a corporation, and we apply a multiple to that based on the risks, risk factors, based on the location. There's multiple risk factors that get factored into that.

And go back to what Bernie said the pyramid of whether that's a problematic practice, a practice that needs to move out of its location, a rock star location with great-- you can own your own building, you're in a strip mall, so there's a lot of factors that get taken into the evaluation. And you don't know what you have until you do evaluation. You can hear-- and again, I don't have the slides. We weren't going to do that. But essentially, you can sell your practice and it's a bad determinant, which is gross revenue.

You can sell it for-- practices are selling from anywhere between 75% of their gross revenue all the way up to 215% of their gross revenue. So as financial planners or private bankers, these are big numbers that you're going to want your client to nail down. Buyers are going to want to know what their return on their investment is, and really, the only way to do that is to determine what the cash flow of the practice is, whether you're the owner or an investor. So that's really how we're valuing practices nowadays.

And again, the most important determinant of value is the patients and the cash flow. Unfortunately, it's simplistic in its explanation, but if you have patients and they're being under performed or under produced on by choice, that's fine you're referring a lot out as a general practitioner. But the underlying thing is that you have good patients, long standing patients, and the cash flow is there, or they can be-- you can do more specialty work as a buyer.

So for buyers that are listening, the important part is that there's potential in the practice, all the patients have not been, for lack of better terms, mind, and there's a lot of good recurring patients, not a transient area. I'll pause there in case Bernie or Larry want to add anything.

No, I think you've pretty well covered it, Neil. Perhaps we can go on to what the multiple is and a little bit about that. Neil talked about cash flow and EBITDA. Perhaps we should take a minute and define that for people who may not be familiar with those terms. EBITDA is earnings before interest, taxes, depreciation, and amortization. Essentially, it's the profit of the practice, the bottom line, the cash flow. That's what buyers are looking for and that's what their advisors are looking at and, certainly, it's what the banks are looking at.

Now, not to complicate it, but just to define our terms, there are different EBITDAs. There is EBITDA that is unadjusted. For instance, if you're taking off, as an expense, the convention you went to in Vancouver last year and it cost you $6,000, which you can take off as an expense, we're going to add that back, because it's discretionary. Same thing if you're paying yourself or a spouse a salary, and the salary is, let's say, above market value. We're going to add that back. So that's called the adjusted EBITDA.

And then we do one more thing, and that is, if an investor is going to buy the practice or even a single practitioner, who's probably been working as an associate for a number of years and getting paid at somewhere around the benchmark in Canada, 40% of production, then they're going to be looking to make the same amount after they buy. The investor is going to have to pay that for somebody to produce the work, and the bank wants to make sure that whoever buys it has something to live on.

So we're going to deduct 40% of the dentistry only, not the entire top line, because that includes labs and hygiene. Just the dentistry, and that's going to become an expense. And that is the cash flow or EBITDA that we are going to work with. Now, the question was asked, are DSO multiples different from other buyers? What is the multiple called? It's the number that you're going to multiply that cash flow or EBITDA buy. And as I mentioned earlier, right now, for single general practices in Canada, it tends to be, on average, between five and seven times.

If somebody owns multiple practices, we're going to see eight to nine times, and we talked about an underperforming practice that sold at nine times. So that's nine times or five times or seven times that cash flow number. And the DSOs are actually people we should say thank you to, because if you're a seller, they're the people supporting the market. In our experience, they are selling between-- they are buying, rather, at between six and eight times.

Now, it should be said that each of the DSOs in Canada have a different business model, so they're not going to be interested in every practice. A practice has to meet certain criterion that will fit into their business model. That's almost a separate presentation in itself, but suffice it to say that, they will pay that for practices that they think are good for their business and fit their business. And in which case, DSOs will pay approximately the same multiples, although I doubt whether they would have paid nine times for the practice we're talking about.

And that's a good segue into, how do you increase value? A lot of people still, as Neil referred to, are thinking in terms of assets. How much is my equivalent worth? How much are my leasehold is worth, et cetera. Basically, they're worth what they produce.

So, I often use the example, if you're going to buy a practice that's, let's say, producing $1 million and has 15-year-old, middle of the road equipment that's still doing the job, and he has a bottom line of let's say $250 or $275,000 in EBITDA, would you buy that one or some practice with brand new, high end equipment, but is only producing 150,000 in EBITDA? Most people are going to buy the practice with the older equipment, because it's all about the bottom line. So how do you increase your value then?

You increase your EBITDA, you increase your cash flow. And probably the number one way to do that is to concentrate on your hygiene, because for general practice, hygiene is by far the most profitable part. Very simply because the supplies for hygiene usually amount to 1% or 2% of production, and the labor costs are usually fixed by a salary rather than 40% of the production, which makes it the most valuable and most profitable part of your practice. It's also the most reproducible part.

Because we know on sale, unless somebody is stupid enough to fire the hygienist when they buy, they are going to keep producing the same amount. That's not true of dentistry. Dentistry costs 40% to produce. Even if you're an owner, the new buyer is going to take that notional 40%, and the supply costs and everything else are higher. So if you want to make your practice more profitable, that's where I would concentrate.

One more thing that you should look at, Neil mentioned the importance of patients, and Larry and I and Neil talked about underperforming practices. How do you know when a practice is underperforming? It's simple math. You look at the production per patient per year. We know that the average for dentistry in most of Canada at this point is somewhere around $360 to $380 per patient, per year. That's not hourly, 360 per patient per year.

If we look at a practice and do the math and they're only producing $300, we know that practice is underperforming. On the other hand, we've seen practices that are producing $800, $900, $1,000, $1,200 a year per patient, that's going to be difficult for a new owner to duplicate. And that cash flow, for a new owner, is going to have to be adjusted downwards. So that really is the crystal ball on how to tell whether there's hidden value in a practice. And again, I'll ask Neil or Larry if they'd like to add anything to that.

I'm just going to add, I think we can move on to the next point. I think you hit the nail on the head with all of that, and how to optimize and increase value of your practice. Again, valuations are a great tool to do a check up on your business and on your practice, so there's no real right time to do a valuation. It's always good to see where you're trending and where you can improve, and valuations will give you those targets and numbers, at least ours will, for sure.

He touched on specialty work that can be referred out or kept in, so there's the added value. And with regards to the contracts, these contracts are things that we review as part of the appraisal process. We're not lawyers, we're not accountants, but there are things that we read every single day. The leases we look for toxic clauses, such as demo clauses, demolition clauses, relocation clauses. And there's certain things in staff contracts, which I'm going to defer to Andrew on, that has just come down because of COVID.

There was a Waksdale decision based on employment law that has kind of turned the employment law industry upside down and back over again. And again, toxic clauses can impact the multiple of your value. If there's a demolition clause and the landlord won't remove it, then the banks are going to look at that as a risk and the fact that you might have to move. You don't necessarily have to, but if the landlord said they won't extend it past five years right now, the bank is going to get nervous in terms of financing it.

So that becomes a factor, but it could be discussed. There's ways around it. There's multiple ways to deal with it, but I would absolutely like Andrew's take from a legal perspective, from a lawyer's perspective, both on the Waksdale as well as any toxic clauses that he sees in his transactions.

Well, I should start off by saying that I'm not an employment lawyer, so I don't know the Waksdale decision, but I do know our firm has an entire employment law department that I work with closely on any transactions that we enter into. Employment contracts are a big issue. Number one, you should make sure that you have employment contracts in place.

If it's a share sale, the employment contract is assigned as of right, but if it's an asset deal, the biggest negotiation you'll have with the other side will be the apportionment of severance liability associated with the employees. Basically, how it works is, on an asset deal, is the Employment Standards Act kicks in and says that the employees are effectively deemed terminated when all of the assets of the business are sold. So then, the severance liability rears its ugly head.

And so, the nice thing about an employment contract is if you have one that a lawyer is drafted and put in place, most of the time, the employment contract the limit that severance liability to the statutory minimums under the Employment Standards Act, which is about a week, a month-- a week, a year of service with a maximum of eight weeks that you'd have to pay out as a potential severance liability.

If you don't have employment contracts in place, common law damages could kick in and could be a big liability to try to negotiate with a purchaser and could have a determinative fact effect on price, because common law damages can range from-- typically, your employees would often be younger or they could have been with you for some time. Those kinds of factors create for fairly large liabilities that could be associated.

A theme that you're going to hear from me, and I'm sure Larry, and I'm sure the guys throughout the next half hour or so is, when you're approaching a sale, contracts is a great thing to start with to go through. Neil mentioned some great things about demolition clauses and leases. What about if-- is there a consent? Does landlord get the consent upon the sale of a business on the new owner? Is the landlord-relationship good? Those sorts of things, material contracts you might have with suppliers.

What happens to those contracts if you're no longer the purchaser? Equipment leases, a lot of you I know tend to lease larger value equipment. What happens upon a sale? What does it say in those contracts on assignment of those contracts going forward? So you want to make sure, the big theme that I hope you take away from the legal side of this transaction is that the more preparation you do in advance of the sale, the less pain that arises during the actual course of the transaction.

Simple things like talk to your corporate lawyer. How does your mini book look? Is it up to date? Have your lawyer walk through the business with you. If, let's say, you're a specialist that has designed some IP, is that IP in the corporation that you're selling? Is it assigned appropriately? All that kind of stuff. Talk to your current lawyer. I'm sure most of you have a lawyer that's set up a DPC for you, maybe did your state work, and possibly acted on a real estate transaction.

Talk to that lawyer about their experience in a transaction of this nature. I know I'm probably getting ahead, but I wanted to make sure that, while I had the floor, that the big thing I want folks to take away is preparation, preparation, preparation. If you're looking at a sale two to three years down the road, if you put a team together like the folks that are on this panel, they'd really be able to help you purify the corporation, have it ready to go, ready for sale. And so, that when you-- because you want to strike when the iron is hot.

When you get a letter of intent that's signed and the deal is about to go ahead, you don't want to all of a sudden then have to deal with a litany of issues in your own business that the purchaser could uncover during diligence. That slows the deal down. It starts to sometimes delay, decreases appetite for purchase. And so, the more we can do as a panel for you in advance, the better. So I know that's more than about contracts, but I did want to say that the preparation of this is crucial.

Very, very helpful. Thanks so much, Andrew. We had a question that was submitted just before we started, so I hadn't sent it to Neil and Dr. Dolansky, but it's related to what you were talking about in terms of hygiene production. So the question said, if you're thinking about selling your practice in two years, they wanted some ideas on how they could increase their hygiene production as well as their overall production. So, I know you touched on that. I don't know if you have anything further to add, but I just happened to see that question roll in.

The two most common things that we see when we look at it practice in depth, which is what we do when we do evaluation in regard to hygiene is, the opportunities usually lie in what's called the sub-gluteal vacuum, otherwise known as an empty chair. In other words, scheduling your hygiene and being able to fill a chair at the last minute because of cancellations, et cetera is probably the most common or the easiest thing to fix.

The second thing is there's a tendency for hygienists and offices, in general, not to charge for everything that the hygienist does. Just to give a quick example, in Ontario, the fee schedule is based on 15-minute units. So if you do, let's say, 38 minutes of scaling and only charge for two units, you're probably under charging. Because anything over half a unit, that extra eight minutes can be charged as a third unit.

And the other thing that we see that is quite effective in higher end practices is giving the hygienists and the people who support them some sort of financial incentive. Those would be the three things I'd look at.

Thanks so much. OK, that's great. I'm glad I saw that question, and I think that was a helpful answer. So we've covered market trends. We've covered determinants of value. We're about to move on to tax strategies. Any other comments before we delve into tax strategies?

Yeah, I wanted to add to what Bernie said. Another thing that I see some clients do after we've appraised their practice and they go back and try and improve their practice over the next two years while they purify their corporations, while they prepare for planning, is they just increase the hours to meet the demand. So sometimes, the hygienists are booked six months plus out, so just hiring another hygienist to work, even an extra half a day.

Or if you don't have the office open on Fridays, if you can bring in a hygienist for Fridays and remove some of that backlog. And essentially, you just need a receptionist and the hygienist. You don't necessarily need a dentist there in Ontario to supervise every single day. So, removing the backlog and getting more patients in on an extra day or extending the hours of hygiene alone, not necessarily having to increase dentistry, will increase the cash flow and the production.

So that's just another tip that people can maybe look at, their schedules, and see if they can support another day of hygiene.

I agree this thing. So it sounds like--

Go ahead.

A good rule of thumb is, and it is a rule, just the rule of thumb, it's rough. It takes about 250 active patients to keep one dentist, one hygienist, busy for one seven to eight-hour day. So when we see a practice with, let's say, 14 or 15 or 1600 patients with one hygienist and one dentist, we know that there's upside there.

OK, that's sounds like you have all the ratios and you're sharing all the different levers that your clients have to make changes and improvements. So we're about to move on to tax strategies. I just want to check in with Nargis. Nargis is our private banker, and she specializes in helping dentists and help them with their banking. Nargis, did you have any thoughts on this? I'm not sure of your perspective, how much you're involved when one of your clients is going to buy a practice or sell a practice. Did you want to share anything?

Sure, thank you, Michael. So where private banking comes in with our clients is really to help them save time. We know that dentists are very busy, obviously, increasing the value of their practices. So it depends on where the client is in their life cycle. We may not get involved at the beginning when they're purchasing a clinic, but once they are operating their own clinic and their time starved, private banking can really help them to save time with the day to day banking. We only cover the personal side of things.

We don't look off to the commercial side, so I would work closely with Chris on that side. And also, as they're accumulating their wealth, they start paying off their debt that they incurred when they purchased the clinic, but now they've got excess cash and they want ideas on how to invest that, and that's where I would work closely with someone like yourself, Michael, to do that planning with them and, eventually, for when they're going to exit that business when they do sell in the future. What is their retirement going to look like?

So we really wanted to help them through that process. We work closely with their accountants and their lawyers just to make sure that the corporate structure is done correctly. A lot of clients do immense amounts of tax planning, so that when they do sell in the future, they don't have as big a tax burden at that time with the capital gain. So that's really, in a small nutshell, some of the ways where we can add value in private banking.

OK, I'm glad. Thanks for that insight, Nargis. OK, so let's move on to tax strategies. What are the advantages of professional corporations and who can be shareholders? So, maybe I'll let Larry start and then Andrew or vice versa. I'll leave it in your capable hands, guys.

Yeah, I think I'll let Larry carry the ball here. But the question that was asked or, what are the advantages of professional corporations, who can be shareholders, differences between asset and share sale, implications if there's a building involved, that question could be a several hour conversation. And so, as much as-- we'll try to hit-- I think Larry and I will probably hit on the high level point.

And if you have questions that follow out of sort of us going at a 40,000 foot view, Mike I'm sure you'll share our email addresses or contact information with the participants. I'm happy to answer follow up questions following this. So I'll hand the floor over to Larry.

Thanks, Andrew. So what are the advantages of a professional corporation? While you're owning the practice, there's probably some legal advantages which Andrew could talk about. But the tax advantages are, you get tax deferral, you get to pay tax at the lower rate or 12% or maybe 26 and 1/2 if you're making over half a million of profit inside your QC. So you get the advantage of tax deferral inside your corporate structure without having to pay personal tax rates. So that's the one advantage while you own it and while you're practicing.

At the time it comes to sell, the advantage is it's a share and it would qualify for the lifetime capital gains exemption. So you can sell a portion of your practice and potentially have a tax free part of the sale, at least on the first eight or 850,000 for your shares. Now, who can own shareholders, or who can be shareholders? That could be any dentist in the practice or their immediate family, so that could be kids, spouse, or, generally, parents.

And the advantage of that is, we now have multiple taxpayers, that if you're selling the practice, we could use up everyone's capital gains exemption. So you could multiply 850,000 by the amount of people that own shares. So having more kids could be a benefit in that circumstance. So in terms of a tax strategy, a good tax strategy starts at least three to four years before you planning on having a transaction to exit, because to get the capital gains exemption, yeah, you have to hold the shares for more than two years.

So we'd have to start a plan multiple years ahead of time in order to make sure that the optimal structure is in place. Normally, if we have a new client, I'm always looking at those shares to determine, OK, who's owning shares? Can we split exemptions? What's the value of the practice? Could we extract more value for selling by kind of multiplying that capital gain exemption appropriately, making sure, of course, once the gains are allocated to those family members, it's technically their assets or their cash if they sell their shares.

Andrew, I don't know if you want to jump in on any legal implications for corporations.

I mean, I know that the biggest reason that I see dentists incorporating is often after they have a conversation with Larry, and Larry runs through exactly what he just did, it's usually tax driven. There is some liability protection, of course. You put sort of a person between you and the business, that person being the corporation. So then, the corporation sort of bears all the liability. Hopefully, you're able to sign your lease and that sort of thing with the corporation without any kind of personal guarantee behind it.

The corporation could be the-- if you're taking financing, could be the financing vehicle rather than you, again, putting up any kind of personal liability and kind of keeping the business and the liability associated with that with the DPC. In terms of who can be shareholders, the voting shares of the pro corp. must be held by the dentist, but non-voting shares can be issued to your spouse, children, if your children are under 18, we often set up a trust, so that their shares are held into a trust and then it unwinds when they become 18.

That's actually often used to sort of save towards University expenses for your children, and then the shares unwinds and cash can be apportioned out as a dividend, where they're not making-- because, Larry, she eats chicken's head at that a little bit, but I mean, the bottom line is, there used to be just a ton of tax advantages. We used to do all kinds of fun income splitting and all that sort of thing.

But the current government that was re-elected after the 2015 campaign and the subsequent budgets really took a run at professional corps and some of the tax advantages are there. But, yeah, I'll hand the floor back over to Larry. I guess, actually, I'll continue to run because the next question that was part of that, Mike, was the asset versus share deal. You want me to kind of run into that? I'd be happy to. Obviously, this specific question could be a full seminar on itself.

But from a high level, and I've already talked about this a little bit, from a high level, purchasers really want asset sales, because they want to identify with the assets they want. They take all. They typically buy all the assets but then they exclude the liability, and that becomes the push-pull of the deal. What is in, in terms of assets, and what's out? And financing associated with-- if there are loans that are outstanding, security registered against the current business, the purchaser would typically exclude that as liability.

And therefore you're really focused on buying the assets themselves. I know there's some tax advantages for a purchaser on an asset sale as well. Share deal, Larry's already touched on it. If you're a seller, you fundamentally want to share a deal. You want to take advantage of the capital gains exemption. And if you work with Larry and I well in advance, a couple of years, three years, in advance of the sale and you have your set up properly, you can really-- I've seen multiple CGEs used in lots of dentistry deed.

Those where you're seeing $1.6 million in tax-free money versus the tax paid on a cap gain, so that's the biggest driver. You don't have the same issues. So as I mentioned, in an asset sale, employees are deemed terminated at the point of selling all the assets, and then the purchaser presents new employment contracts and new offers to sort of mitigate any severance liability. And hopefully, everybody takes the new offer similar terms and moves forward. That's not always the case, but that's the hope.

In a share deal, the employment contracts that are in place assigned, so that's why they do become fairly important. If you don't have them in place, please reach out and I'll make sure that an employment contract-- employment lawyer puts together the appropriate contract. And the biggest push-pull in a share deal is about liability, because when a purchaser buys a corporation shares, it buys the corporation, and the term that we like to use is warts and all.

So the big push-pull becomes-- the seller wants to walk away from that transaction without much trailing liability, and the purchaser would like the seller to provide some risk sharing following the sale of the business. So that, often, in a share deal, becomes the big push-pull. How long you give representations and warranties about your business? How long do those representations and warranties survive? What is the cap on what you could face as a potential indemnification provision down the road?

How big does that claim have to be before it counts as a claim that you have to take on? These sort of things become heavily negotiated in the definitive, whether it's an asset sale negotiating the apportionment of severance risk or in a shared deal the apportionment of trailing risk after the deal closes. Those are the push-pulls, and that is a very high level discussion of the two. I'm sure Larry might have some tax-driven factors to consider as well between the two.

So, generally, a share sale is going to give you access to a capital gain exemption and it's cleaner and a little bit easier from the seller's perspective. It generally results in a bit lower tax. The purchaser wants an asset purchase because they don't have to carry, keep all the warts, as well as they get then goodwill and they can amortize that over time, so they can get a little bit of a write off on some of the assets over 20 years or so that they hold them. It's also important probably to make note that a lot of the DSOs do both.

So you have an asset sale followed by a share sale, so it can be a little bit more complicated, so the tax impacts are much different. And it's almost like having two sales in succession with some tax planning in between. So it's important probably when you talk to your account and lawyer to say, hey, have you have you done these before, these sort of hybrid type deals with, say, safe income strips or whatever needs to be done ahead of time in order to make sure that they have experience with it, because it can get very complicated very quickly.

And it's important to know the steps in the order of the steps, because they do sort of a carve out transaction or a reverse carve out. There's a whole bunch of different tools in the toolbox when they're coming down to do a purchase to make sure that we can find the most tax advantageous amount for the seller, while still fitting in the required tax boxes of the purchaser. So it's good to know what levers you need to pull and what the impacts are going to be downstream from making those decisions, because generally, the deal move forward fairly quickly.

So I think that's sort of a covers that one. What are the implications if there's a building involved? I mean, sometimes it can make it-- doesn't matter, and sometimes it's very complicated. It probably depends. Are you selling it? Is it in the same corporation? Is it in a separate corporation? Is it included in this sale? Are you holding on to it and renting it later? Is the building-- who are tenants of the building? So it depends if the tenants are all just the practice or if there are other tenants that are third parties.

There's all those different implications, so the answer is, it really depends and it's very situational and specific.

I must say, I have seen where the buildings-- if the building itself that houses a clinic is owned by the current dentist, I've seen like most times in the transactions I've done, that dentist that's selling hangs on to the building and rents it to the incoming purchaser as sort of a cash flow stream coming in after the sale of business.

Ah, yes, the only thing I'll make note is that, if you have a building at 100% of the use of that building is your practice, that's active, the sale of shares of that corporation that holds the building is eligible for the capital gain exemption. So if you have a little bit more to spread around, you might get a really nice tax result if you can sell the shares and not the actual building asset itself. And then you don't have to worry about recapture and all these other things, so it factors into the decision, but I just thought I'd kind of add that extra point.

From a sales perspective, I just want to jump in. Not from a tax perspective, because it is tax effective and there are some carve outs like Andrew was saying. But from what we see in the market is, if it's a single use owner occupied, the banks will finance it at 100% as well over a longer term. And buyers want to be able to control their space, and so the banks and the buyers, most of the time, feel more comfortable.

But you are right, Andrew, sometimes we will see some sellers hang on to the building with first right of offers where in three or four years, when cash flows are a little bit better and more palatable, they'll buy it at that point. But a lot of times, the buyers just want to grab it right away. If it's not 100% owner-occupied, so there's other tenants, it becomes much more difficult. The last point I will say is when it's held in a corporation, and you're selling shares.

And I won't talk about the tax implications, but there are tax implications to then strip the building out of the corporation if you're selling shares of the practice. And if you're selling assets, there's higher asset-based taxes on a sale if you have to end up selling assets of your practice. So that being said, I'll go back to Andrew's really good advice that he provided, which is plan, take the time to plan, figure out what you're going to sell, how you're going to sell it, how you're going to divide it up.

You owe that to yourself to plan and get ahead of the game. And I think that leads into our next set of questions in the respect of people's times.

OK. OK, so, that's it for wrapping up tax strategies. We're moving into timing in the sale process.

Sure.

Let's move these slides over.

Larry and Andrew are you already finished? (laughs) Did you?

Yeah, I did.

Yeah, I think we covered-- we proved the points that we can cover in that sort of block, allotted for that question.

And you're right, we can do a half day. We can do a half day conversation about this too.

We absolutely could.

The nice segue into the timing and sale process is what you mentioned. You're hearing that we're really stressing the plan. And you should take careful note of what Larry said about, you've got to have those shares in your hands for two years to qualify for the CGE. That's a big deal.

And so, if you're looking down the road at the sale of your business, even if it's a five year time horizon, there's no reason not to reach out to an accountant that has this kind of specialty to make sure that you're properly structured to take advantage of the CGE on the way out, and multiple CGEs if possible. And so, I think I'll hand it off to Larry, Neil, and Bernie on when should you sell.

OK, I'll lead off. It's probably one of the most frequently asked questions that I get from colleagues. When do you start? And it's really, it becomes a personal decision. But I'll give you a few, let's say, guideposts. The first thing I would say is, it's never a good financial decision. No matter how much you get for your practice, you're not going to get the return on the money that you're getting from your dental practice, which can be anywhere from 15% to 30% on your capital, so it's a stupid financial decision to sell.

But it's probably, for many people, at the right time, the best lifestyle decision they can possibly make. And that's what it comes down to, when you're ready to give up some of the responsibilities of practice. And I sold my practice about 10 years ago. I'm very happy I did. I don't know how I would cope with some of the red tape and regulation and everything else that has happened in the last few years. And that's basically the number one reason we're here.

Bernie, I still love doing dentistry, but I'm really tired of moving and running a practice, and that is a lifestyle decision. So, there is life after practice ownership. Many of our clients sell and they'll stay three to five years doing what they like, which is practicing dentistry, seeing the patients that they've formed bonds with over decades, but without the responsibilities of running the practice. And like I said, when you're ready for that, that's when you should start thinking. And as everybody is saying, do your timing correctly.

Neil will get into it, but the sale process itself can take six to nine months. The fact that most buyers are going to launch this day for a minimum of six months sometimes 12 to 18 months, the DSOs are going to want you to stay for three to five years, factor that into that lifestyle decision. Neil, do you want to take it from there?

Sure. So in terms of, again, planning, planning, planning, I like to ask my clients when they want to hang up their handpiece, when's the last day they want to be doing dentistry, and we work the plan backwards from there. So do they want to work for-- is there room for them to work in their practice post-sale? Do they want to work post-sale? If there's no room, that could be as short as six months. If there's room for them to stay, it could be 12, 18, 24 months longer, if the relationship is going well.

But really, the evaluation process could take anywhere between six and eight weeks. Getting it on the market, like Bernie said, putting it on the market, doing the showings, getting a buyer, getting the contracts done, again, six to nine months is a comfortable timeline. We can do it quicker if it's a rush, but you don't always succeed in achieving all your goals if you're in a rush. So again, you owe it to yourself to plan this properly.

And if you do want to sell to the DSOs or even to an individual where you want to stick around, but don't want to own the practice, you can start planning easily five plus years out from when you want to hang up your handpiece and walk out, and be vacationing 10 months of the year. So again, planning that is important and give yourself at least 12 months of getting ready to sell your practice. It's a very comfortable timeline to work with, so it does take a lot of time.

And the buying selling process, like I explained, valuation, marketing, listing, identifying the buyers, lawyers and accountants doing their work, putting together the agreements, reviewing the agreements, closing the sale, and then your transition process, however long, fixed 12, 18. So, that's just a snapshot. And again, back to Andrew's point, and I've said it again, surrounding yourself with a good team of people who know what they're doing in this industry will net you the best results, so surrounding yourself with an accountant.

Don't be afraid to ask your accountant or lawyer how many times they or their firm have helped dentists buy or sell a practice. And if the answer is one or less, then you might want to seek a professional, not for all the time. You don't have to change accountants or lawyers, but to help you buy or sell the practice. Larry and Andrew could probably say they have some clients that approach them just for the buy or sell, and then they go back to their preferred lawyer, accountant. But again, we want to help you, and I know they do want to help you be successful at the purchase and sale of your business.

Yes, I mean, it's a good point, Neil. Like sometimes, the accountant will reach out to me and say, hey, I know you do a lot of this stuff, but can you just review the structure for this client and let me know what you think. We're kind of doing some planning and it's your planning. And then closer to the transaction, then say, hey, can you consult and help with this transaction and the deal? And let me know what I need to do so I'm not missing anything. And we just act as a third party to assist in that regard.

So we don't always-- we don't have to continue on the work. It's more just we can come in as a specialist for that particular task and then back away as they continue on. It's just for this point in time that some extra expertise was needed. So it's not a permanent change.

That works the same in the legal industry. I've been retained as purely transactional counsel to come in and do a deal, but the corporate paperwork and the estate planning and all of the other things that real estate stuff, all stay with the relationship that you've had for all this time. And basically, I come in or we come in or another transactional lawyer comes in to actually carry out the deal. Because especially if you're selling to a DSO, a DSO is going to have a Bay Street transactional law firm acting as their counsel.

They'll stuff it with five to 10 lawyers to make sure that they move as quickly as possible. And so, you want to make sure that you're retaining a transactional law firm or lawyer that has resources to be able to move as quickly as our pastry counterparts. I spent eight of my years as a lawyer working for a Bay Street firm doing M&A work. And so, I have a keen insight into how they operate. And I would just say that you want to make sure you have the best team assembled.

And that includes-- it's always nice to try to have a law firm and an accounting firm working with the brokers and the bankers, and all have done this and work together before, so that it's a pretty seamless transition. And like I said, I go back to my earlier point, six to eight months is a good time horizon. I wish my clients would give me that time horizon. Usually, I see a letter of intent at my desk with a closing date of a month out.

I will mention that if anyone ever puts a letter of intent in front of you, you run that thing by a lawyer and an accountant before you ever sign it. That's the biggest issue I've seen, is that maybe the dentist takes a big hand in negotiating the terms of the LOI and then they sign it. And we have a lot of difficulty moving the business deal off that LOI and those business terms that come in.

So, if anybody puts any legal document in front of you, even if it's just an offer, even if it's a schematic, a slide show, run that by your account and your lawyer and your broker, if you're working with a broker on the deal. I guess that's what I'll add on that process.

The best example of everything you've heard for the last 10 or 15 minutes that I can give is a client have meals in mind, where we close the deal three months ago. He came to us three and a half years ago to just do a valuation, see what he had, and discuss his plans. He actually took our advice, and over the ensuing three years, increased the value of this practice by a million and a half dollars, sold for north of $4 million, and because he had great tax advisors and lawyers, he paid no tax. So it can be done.

Well, that's a great example. And with that, we're nearing-- we should just about wrap up. I want to be respectful of the time of our guests. I just want to check in with everybody. Did anybody else have anything further to add? What I'll do is, if somebody has something to add, they can. I'll now stop the recording and I'll open it up to some live Q&A, and we'll probably do that for about five minutes. So, any concluding statements?

I don't want to step over the participants. I see that were somewhere around 40 participants that are logged in. I know that this is a Friday. I sent an email before this call to about 35 people that work in the private industry in Ottawa and got about 25 bounce back saying they were out today. So, the fact that you've taken the time this afternoon to come and learn a bit about some of this planning that we're talking about is appreciated by the panel.

And I don't want to step on any banker's toes, but I want to address that last question really quickly. Talk to your bankers if you're looking to buy a practice. Even if you're looking to sell a practice, speak to your bankers, get them involved. If your personal commercial banker doesn't deal with health care or dentist financing, they will have people that they can contact and get involved. It's important to have people that are knowledgeable in the dental field, so that you're successful on your purchases.

Because we've seen it too many times, where a commercial banker will try to handle this sale that they're not familiar with and it just hurts the client. So seek out a dental or health care specialist who has the knowledge of the dental field that can work with the professionals in this field. And hopefully, you're successful at buying a practice, if you're on the purchaser side, and selling the practice, making sure that everything is lined up, and you've got a good team ahead of you. So those are my final comments.

And my final comment would be, this is a wonderful profession. And we spent the last hour or so talking about the business part of it. But it is a unique profession, because, I hate to use the word, the product, perhaps the service is a better word, that we sell as people's oral health care. So never lose sight of that, because that is really the basis of the value of the business. And the banks, I think, endorse that. Correct me if I'm wrong, but I don't know of any other business in Canada that the banks will finance at 100% with 10 to 12 year amortization. It's a great profession.

I agree with you 100% that the health care set of things as to one industry, we do 100% of financing. And what's really important, buying a practice can be intimidating, but the role of the bank is to really to simplify everything for the client. And we do have health care specialized, commercial account manager, so that's all we do, so we have a team of 3.

And then, so, please talk to a banker. Just like many other partner on the call said, preparation is the key. Prepare, prepare, get off the involved, and then get a team of professional accountant on this panel to us to make sure that the transaction is as smooth and effective as possible.

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